Schaeffer's Investment Research

FEB 06, 2013 2:45 PM

GME skeptics are selling short-term calls.

Shares of GameStop Corp. (NYSE:GME) plummeted in early trading today, and options traders aren't expecting a rebound anytime soon. As of 10:51 a.m. ET, the videogame maker has seen more than 6,000 calls cross the tape -- about 17 times the norm. However, a healthy portion of the volume consists of neutral-to-bearish bets.

Diving right in, the February 27 and 29 calls are most active, with around 2,000 and 1,000 contracts traded, respectively. Implied volatility at the 27-strike call is more than 15 percentage points higher, and volume at the deeper out-of-the-money call has exceeded open interest -- both signs of new initiations. What's more, the majority of the calls have crossed at the bid price, suggesting they were sold.

By writing the calls to open, the sellers expect GME to remain south of the strikes through the closing bell on Friday, February 15, when the front-month options expire. In this best-case scenario, the calls will remain out of the money, and the sellers can retain the entire premium received at initiation.

In fact, delta on the February 27 call has dropped to 12% from 47% yesterday, while delta on the 29-strike call has fallen to 4.4% from 9.9%, underscoring the options' diminishing odds of finishing in the money. However, the stock's Schaeffer's Volatility Index (SVI) stands at 37% -- above just 13% of all other readings of the past year. In other words, GME's front-month options are relatively inexpensive at the moment, which favors option buyers more than sellers.

At last check, the shares of GME have given up 8.6% to explore the $24.50 neighborhood. Some analysts are attributing the drop to reports that Microsoft Corporation's (NASDAQ:MSFT) next Xbox will require an Internet connection, which could be a blow to the used-game market. The stock is now poised to finish south of its 10-day moving average for just the second time since January 16.